RBI monetary policy review: The Reserve Bank of India (RBI) on Tuesday (December 1) kept its policy repo rate unchanged at 6.75%, as expected after the front-loaded rate cut of 50 bps on September 29. Three factors – inflation within target this fiscal, continued windfall from lower global oil and commodity prices, and a need to push up the pace of domestic demand – influenced the policy decision this time as well. The central bank, however, cautioned vigil on core inflationary pressures, which could see some uptick as consumer demand and inflationary expectations perk up due to Seventh Central Pay Commission payouts next fiscal.
Our view on RBI Monetary Policy Review:
· We believe the RBI will keep policy rates unchanged for the rest of this fiscal unless inflation surprises on the downside. The RBI policy remains accommodative. In 2016-17, if inflation continues to move down the glide path, there will certainly be some room for further policy rate cuts.
· The apex bank is confident of meeting its January 2015 inflation target of 6%, but is cautious on the inflation outlook for next fiscal. Though it has set itself a 5% inflation target for 2016-17 end, payouts under the Seventh Central Pay Commission (CPC) could cause a transitory bump in inflation. Also, close coordination between the Central and state governments will be crucial to keep a tab on food inflation, which could see some pressure due to slow rabi crop sowing.
· Policy transmission remains weak, and that is an area of concern. So far in 2015, the policy repo rate has been cut by 125 bps. But while market-driven interest rates such as those on CPs and CDs have fallen 90-120 bps across maturities, bank lending rates have seen much weaker transmission. This limits the boost to consumption from lower interest rates.